Walther is a “shrinking piece of business”

Smith & Wesson and Walther have begun to part ways. According to information released by S&W in an earnings conference call on June 28, 2012, it is pretty clear why the split is coming: sales and margins.

But the split is not a complete parting of ways. In fact, 2/3 of the current agreements between the two companies will remain in place.

According to James Debney, President and CEO of Smith & Wesson Holding Corp., there are three separate agreements between Smith & Wesson and Walther:

• S&W is the exclusive distributor of German-made Walther firearms,
• S&W manufactures and distributes Walther PPK pistols made in Houlden, ME, and
• Walther manufactures S&W M&P 22 pistols in Germany.

Of these, only one is ending in 2013: Smith & Wesson’s importation and distribution of German-made Walther guns. That contract will expire on April 30, 2013. The other two contracts will remain in place, and will be valid for two more years. Future negotiations could extend those agreements.

So, why the split on the distribution rights in the US? The Walther press release paints a pretty picture, while Debney made it plainly obvious he feels S&W is better off without the Walther agreement. To be fair, in his opening statement, Debney was very complimentary when describing the relationship between the companies. However, the numbers he presented certainly suggest S&W is better off without Walther, than with them.

Debney said that Walther is a “shrinking piece of business,” and that the Walther line has “lower gross margin[s].” In other words, fewer guns are selling, and those that do generate smaller profits than other products in the Smith & Wesson stable.

Debney said that 2010 was the financial peak in their relationship with Walther. That year, revenues on the guns totaled $44 million. By 2012, revenue had dropped $12 million to only $32 million.

“So, we have a piece of business [Walther] which is smaller than the revenue generated by our Bodyguard 380, a single SKU” said Debney.

If the entire line of Walther guns is generating less revenue than a single product in the Smith & Wesson line, and at a lower margin, cutting loose from the German company would appear to be a sound financial decision.

The PPKs made in Maine amounted to about 15% of the entire Walther revenue realized by S&W. That amounts to about $4.8 million of the Walther business of which Smith & Wesson will still have a piece. I don’t know if the margins on this gun are any greater than the rest of the Walther line.

Bottom line? Walther has opened shop in the US, and will be distributing their own German-made guns in the states starting in 2013. They will continue to make the M&P 22 for Smith, and S&W will continue to make PPK pistols for Walther.